Types of SEC Enforcement Actions Explained.

The SEC takes its enforcement actions in two forms: federal civil actions and administrative proceedings. Each of these is a distinct type of proceeding with its own unique set of rules, procedures, remedies, trial rights, and appeals process.

A civil enforcement action begins with a complaint in federal district court. The civil action proceeds in federal district court unless the complaint is dismissed, or the action is settled in mediation or negotiation.

An administrative enforcement case begins with an SEC order instituting proceedings. The administrative proceeding is held at the SEC in Washington, D.C.

These are procedural labels. To describe its enforcement actions by subject matter, the SEC also refers to cases as “issuer,” “trading,” “offering,” or “regulated firm” cases. Examples of this form of case naming are “cryptocurrency,” “cybersecurity,” and “SPAC” cases. In these cases, the SEC also files a complaint or issues an OIP, depending on the procedural action selected, and proceeds to trial or settlement based on the procedural action involved.

SEC “issuer” cases include cases that involve financial reporting fraud, financial statement fraud, and violations of internal accounting controls; as well as matters such as financial reporting, disclosures, and issuance of unregistered securities.

SEC “trading” cases include cases that involve insider trading, market manipulation, front-running, and other forms of abusive brokerage conduct.

SEC “offering” cases include cases that involve fraudulent offerings, unregistered offerings, and unregistered securities sales by unlicensed securities brokers.

SEC “regulated firm” cases target broker-dealers, investment advisers, auditors, banks, financial services companies, stock exchanges, and other regulated entities.

When does an SEC investigation become an enforcement action?

An SEC investigation can be either informal or conducted under a formal Commission order. When an investigation is informal, the investigators are limited to asking targets and others to provide information on a voluntary basis. When an investigation is conducted under a formal Commission order, the designated SEC staff are authorized to seek information by issuing subpoenas. Under its statutory authority, the SEC can issue subpoenas only in investigations conducted under a formal order of investigation. A subpoena, by itself, does not indicate that the Commission has authorized an enforcement proceeding or that SEC staff have filed a civil or administrative complaint.

During an SEC investigation, investigators, typically in the SEC’s Division of Enforcement, work to build their case. This process often involves taking sworn testimony from witnesses, reviewing documents, examining computer files, and searching other forms of electronic communications. Investigations can go on for months or even years. At some point, the investigation will either end without any charges being brought or the SEC will move to file enforcement charges against its target.

If the staff decides to recommend that the SEC bring charges, it will issue what is known as a “Wells notice.” A Wells notice is a preliminary communication from the SEC and signals the staff’s intention to recommend that the Commission bring enforcement charges against the recipient. Upon receipt of a Wells notice, prospective defendants can respond in writing to argue why charges are not warranted. This is known as a Wells submission.

Once the staff recommends enforcement action, the SEC commissioners decide if an administrative order or a civil complaint is warranted. After this, the Commission authorizes the enforcement action, and then the enforcement action is filed. An SEC investigation is almost always non-public until an enforcement action is filed or announced. Targets of an SEC investigation may learn of the investigation through a subpoena or other formal request from SEC staff, as well as from inquiries from financial institutions.

In many investigations, the investigation is resolved without charges being brought. When this happens, the SEC will either dismiss the investigation or terminate it with a termination letter that is sent to the targets of the investigation, which expressly states that it must not be construed as indicating that the recipient has been exonerated. Other times, parties may be able to intervene prior to enforcement actions and convince the SEC to end the investigation without charges.

What happens when the SEC files in federal court?

SEC enforcement actions in federal district court are governed by the Federal Rules of Civil Procedure. These are the same rules that govern other federal civil litigation. Here are several key differences between civil litigation and administrative enforcement cases:

Article III Judges

SEC enforcement actions filed in federal district court are heard by Article III judges. Article III judges have lifelong tenure, salary protection, and are appointed by the U.S. President. Administrative judges are appointed by the SEC.

Preponderance of the Evidence

The SEC is required to prove civil violations to a preponderance of the evidence. This is the lowest standard of proof that requires a party to show something is more likely than not to be true. Administrative cases generally rely on the same standard of proof as civil cases.

Seventh Amendment Trial Rights

Defendants in SEC civil litigation can demand jury trials when the Seventh Amendment applies to the SEC’s claims. However, the Seventh Amendment does not apply to administrative proceedings. Under its decision in SEC v. Jarkesy, the Supreme Court has recently clarified that juries are required when the SEC seeks penalties for securities fraud.

Appeals

Federal district-court judgments are appealed through the ordinary federal appellate process. Administrative proceedings have their own appeal process, and appeal decisions must be accompanied by written opinions.

Litigation Releases

SEC civil actions are summarized publicly through litigation releases that the agency publishes online. Litigation releases are issued when the SEC files a civil action and again at significant developments in the case, such as judgments and settlements. Litigation releases are often inaccurate and omit key details.

Consent Judgment

Similar to settlements in state courts, federal courts enter consent judgments that resolve SEC district-court actions against broker-dealers, investment advisers, and other other entities. Consent judgments in administrative proceedings are called “consent orders.”

How do SEC administrative proceedings work after Jarkesy?

SEC administrative proceedings are governed by the SEC Rules of Practice, codified at 17 C.F.R. Part 201. Administrative proceedings have their own rules and procedures that generally are separate from district court civil litigation. Here are four key aspects of SEC administrative proceedings:

Initial Decisions and Final Orders

In most administrative proceedings, an administrative law judge (ALJ) hears the case and issues an initial decision containing factual findings and legal conclusions. The Commission can review the initial decision on either the parties’ request or its own initiative. If the Commission reviews the initial decision, it will then issue a final order. Unreviewed initial decisions may automatically become final Commission decisions.

Right of Appeal

After the Commission issues a final order, parties may petition for review in the U.S. Court of Appeals for the circuit in which they reside or have their principal place of business, or in the D.C. Circuit, within 60 days after entry of the order. If the Commission did not file a civil action, parties may appeal the order directly in the U.S. Court of Appeals.

The Availability of Administrative Proceedings

As established by SEC v. Jarkesy, administrative proceedings are available when they do not implicate Seventh Amendment jury trial rights. This limitation applies in the absence of applicable federal rules, such as SEC Rules of Practice. Other than in fraud-penalty cases, administrative proceedings remain available for other enforcement matters.

The Lack of Juries

Administrative proceedings, by definition, do not have juries. An ALJ or commissioners will serve as factfinders in administrative proceedings. This is another area where SEC administrative proceedings differ from civil enforcement actions.

Matters Reserved to Administrative Proceedings

Generally, there is no federal rule that reserves administrative proceedings for “minor” violations or negligence-based violations that do not warrant District Court jury trials under the Seventh Amendment. However, there are exceptions.

Todd Spodek is the managing partner of Spodek Law Group, a second generation criminal defense firm that has been practicing since 1976.

What are the remedies in SEC enforcement actions?

The SEC has the authority to seek a broad range of remedies in civil and administrative enforcement actions. These include both monetary and nonmonetary remedies. The SEC can generally seek the following remedies in enforcement actions:

• Injunctions

• Civil penalties

• Restitution

• Disgorgement

• Cease-and-desist orders

• Prejudgment interest

• Officer and director bars

• Bar orders against securities brokers and investment advisers

• Revocations of registration

How do SEC enforcement actions differ from parallel regulatory actions or criminal matters?

Another important aspect of the difference between administrative proceedings and SEC civil actions is what they are not. In SEC litigation cases, the SEC must prove its claims only by a preponderance of the evidence, and it cannot obtain a criminal conviction. The SEC’s enforcement authority is distinct from DOJ prosecutorial authority. In most cases, however, parallel actions will be pursued. This could include other regulatory enforcement action taken by the U.S. Commodity Futures Trading Commission (CFTC) or state-level enforcement actions taken by attorneys general in the U.S. or state regulatory bodies.

What penalties and emergency remedies can the SEC seek?

The SEC has the authority to seek a wide range of financial and nonfinancial penalties in both administrative and civil cases. However, there are some differences. For example, an SEC administrative proceeding cannot seek an injunction. An injunction is a court order requiring or prohibiting a specific act. Federal courts can issue injunctions in SEC enforcement actions.

Civil Monetary Penalties

The SEC can impose civil monetary penalties in administrative and civil proceedings. While it may seek a civil monetary penalty based on any violation of the securities laws, such a penalty is presumed to be warranted if the violation involves fraud, deceit, manipulation, or deliberate or reckless disregard of a statutory or regulatory duty. There are three “tiers” of civil monetary penalties. The severity of the violation of the federal securities laws determines the tier of the penalty the SEC seeks, and the maximum penalty per violation is multiplied by the number of violations.

Disgorgement

The SEC can seek disgorgement in civil and administrative proceedings. In an SEC enforcement action, disgorgement aims to recover illegally obtained gains rather than punish a defendant for its conduct. In administrative proceedings, disgorgement of the ill-gotten gains is deemed a form of administrative sanction. However, in district court civil actions, disgorgement is considered to be a legal remedy or equitable remedy. Under Liu v. SEC, the Supreme Court held that the SEC’s power to seek equitable disgorgement is limited to the net profits of illegal conduct.

Administrative Sanctions

The SEC has the authority to impose administrative sanctions in administrative enforcement proceedings. For example, the SEC can suspend registrations and revoke licenses. The SEC has the authority to revoke the registration of broker-dealers, investment advisors, and other regulated firms. The SEC can also impose industry bars against individual defendants, prohibiting them from acting as officer or director for a publicly traded company.

Temporary Restraining Orders, Asset Freezes, and Asset Repatriations

In enforcement action cases, the SEC can seek a temporary restraining order (TRO), asset freeze, or asset repatriation order from a federal district court. A TRO or an asset freeze is necessary to preserve assets before an enforcement proceeding can reach a conclusion. Once a defendant assets are frozen in the U.S., the SEC may seek an asset repatriation order. This order is essentially a request for foreign nationals to return assets to the U.S. for adjudication.

Receiverships

Again, federal district court judges, not the SEC, have the power to appoint receivers. A receiver is a person appointed to hold or sell property at issue. Once a receivership is imposed, the SEC is unable to do much else until the receiver liquidates the defendant’s assets or distributes them to eligible plaintiffs.

Consent Judgment and Consent Order

Similar to other civil litigation in federal court, defendants in SEC enforcement actions can settle civil and administrative cases through a negotiated consent judgment or order. In many cases, a consent judgment or order will include a statement that defendants neither admit nor deny the SEC’s allegations while they agree to monetary penalties or other nonmonetary remedies.

Can the SEC bring criminal charges or FINRA cases?

The SEC does not have the authority to prosecute defendants for federal crimes. The Justice Department (DOJ), through the relevant federal U.S. Attorney’s Office, is responsible for prosecuting federal criminal charges. Generally, this means that the government is required to prove the charges beyond a reasonable doubt. A criminal prosecution is the only enforcement action that can produce imprisonment for securities-law misconduct.

While the SEC does not have the authority to prosecute federal criminal charges, the SEC and DOJ can simultaneously seek to hold the same defendant responsible for the same alleged securities-law misconduct.

What is the difference between an SEC investigation and an SEC enforcement action?

A central feature of the SEC’s enforcement process is the distinction between an SEC investigation and an SEC enforcement action. An investigation is a nonpublic inquiry that seeks to determine whether charges are warranted. The process of collecting evidence can include taking sworn testimony from witnesses, reviewing documents, and searching computer files and other forms of electronic communications. An investigation may be informal, or it may be conducted under a formal Commission order. Once charges are deemed warranted, the SEC will either initiate an SEC civil action or an SEC administrative proceeding.

As discussed in detail in section (C), Administrative proceedings can be a matter of a “civil action” or “administrative proceeding.” These are governed by different rules. Some investigations can conclude without any charges. Even if the investigation had evidence of a violation, investigators or the Commissioners may conclude that no charges are warranted. Alternatively, this can happen if the defendant is cooperating with the investigators, and it will make the case easier to prove in the District Court.

The SEC cannot pursue a criminal prosecution on its own. A separate and independent charging decision is required. This is the difference between an SEC enforcement action and a criminal prosecution. Once the SEC concludes that an enforcement action is warranted, it can refer suspected criminal conduct to the DOJ, and then if the DOJ deems it warranted, the DOJ will file charges with the relevant District Court.

What is the difference between an SEC action and a FINRA action?

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization (SRO). FINRA is not a federal government agency, so it does not have the same statutory authority as the SEC. FINRA has the authority to conduct disciplinary proceedings, which are different from an SEC administrative proceeding. The SEC oversees FINRA’s compliance with the federal securities laws. This includes FINRA’s rulemaking, registration, and enforcement proceedings. When an enforcement action is initiated, the SEC will supervise the proceeding and can review a defendant’s appeal at the Commission level. In the Federal Court of Appeals, a federal judge will have the final say in the proceeding, which is very similar to a District Court action.

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Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.